Best Way To Play Teavana

Teavana LogoTeavana (TEA) “operates as a specialty retailer of loose-leaf teas, tea wares, and other tea-related merchandise in the United States, Canada, and Mexico.” Earlier this month, Starbucks (SBUX) bought Teavana for $15.50 in cash and the deal was expected to close by the end of the year.

However, a week back, a short seller Glaucus Reasearch claimed that “independent laboratory tests show that Teavana’s teas contain pesticides in amounts that exceed U.S. and EU regulatory limits.” It advised that Starbucks walk away from the deal. Teavana shares immediately crashed below $15 and continue to trade between $14 and $15.

Glaucus Research does thorough work and focus on fraud at public companies. They have mostly focused on Chinese companies before Teavana. Their report is pretty through.

Now, I have no idea if the deal is going through. Obviously, the probability is still high that it will go through based on the Teavana stock price and option pricing. But there are some interesting ways to play this deal.

$15 May 2013 Calls

The simplest and best way to play this deal is to sell the $15 May 2013 calls. You can currently sell them at $.45 right now. For some reason they traded as high as $.50 yesterday and $.49 today. 

I am assuming that if the deal goes through, it closes at $15.50 and nobody comes in with a higher offer. If it does not, it goes below $15 and stays there. The stock was trading at around $10 before the deal and probably will drop below that if Starbucks reneges on the deal.

At the $.45 price, the probability the deal goes through is 90%. That is the highest out of all the options play. For example, the May 2013 $15 puts were trading around $1.50. If Teavana falls to say $7.50 if the deal falls through, it is pricing a 80% probability of the deal going through.

If you sell the 10 calls, your upside is $450 and downside is $50. A great risk/reward ratio.

Arbitrage Play

Since the probabilities are different for different option plays, there is more interesting ways to take advantages of this discrepancy. For example:

  • Sell 20 $15 May 2013 calls at $.45.
  • Sell 1 $15 May 2013 put at $1.50. 

You make money based on 2 simplistic scenarios.

 Scenario 1: Deal goes through at $15.50. You lose $100 on the calls, but make $150 on the puts for +$50.

Scenario 2: Deal does not go through and Teavana stock price goes to $7.50 and stays there till May. You lose $600 on the puts and make $900 on the calls for a profit of $300+. 

I have put in an order to sell May $.50 calls hoping somebody bites, but I may sell May  $.45 calls. 

Disclosure: I do not own any positions.

Abbott Board Approves Spin-off

Abbott (ABT) announced today that its board approved the spin-off of its research-based pharmaceuticals business Abbvie (ABBV). For every one share of Abbott, investors will receive one share of Abbvie. The distribution is expected to be paid on Jan 1st 2013 to holders of common stock at the close of Dec. 12. 2012.

Read more about it here.

Disclosure: I do not own ABT

Why I Like Facebook

Facebook Like ButtonI was going to write this article about Facebook (FB) a couple days after the biggest lock up expiration on November 14th. Lockup expirations allow early employees and investors to sell their shares on the open market. The plan was that since Facebook stock had gone down during the last lockup expirations, it was going to go down again as new shares flooded the market. I would be able to scoop up the shares at my intended target price of between $15-$20.

However, a funny thing happened. On November 14th, instead of the stock crashing like I had hoped, the stock shot up from below $20 to above $22 and I was not able to buy shares. Two weeks after the expiration the stock has gone up a staggering 30% to close above $26 yesterday. Although I have no plans to buy the stock at this price, I wanted to share why I like Facebook as an investment under $20.

Valuation

I agree that Facebook is expensive by all metrics. However, at $20 it is not that expensive. At $20, its market capitalization is around $40 billion. About $10 billion of that is in cash from the botched IPO. Its cash flow is more than a $1 billion+ a year and that is growing over 20% a year. If you back out the cash, you are talking about a PE of 30. It is not unreasonable for such a great company.

Facebook will be able to generate a couple billion more in cash flow over the next coming years. If it does, at $20, you are talking about an inexpensive stock. 

Here are some of the reasons that will enable it to generate more cash in the future:

Smartphone Prevalence

According, to a great article by the business insider, “there are an estimated 6 billion mobile handsets in the world, and only about 1/5th of them are smartphones. Over the next several years, most of these handsets will be replaced by smartphones.”

The smartphone revolution will give a big boost to the already 1 billion+ subscriber base. Although, these users will have lower average revenue per user because they will be poorer, it should increase Facebook’s overall cash flow. Also, it should increase the engagement from users as the world is more connected.

 Although, there are challenges to advertising on the mobile platform, Facebook proved last quarter that it will be able generate revenue through advertising.

Open Graph

“Facebook Open Graph is an attempt to map all the complex interactions existing between you, your friends and the content you all like.” Although, this sounds complicated, it is not. Facebook is mapping the real world on Facebook. When you like an article on HypeZero or share a song on Spotify, it captures that information and  is able to build a better profile about who you are.

The obvious implication is that it and its partners are able to target advertise directly towards you taste. As a result, you are more likely to click on an advertisement.

Obviously, Facebook advertisements are not as powerful as Google’s where you are actually searching for something, but it will be possible for Facebook to compete with Google on search because of Open Graph. As Facebook maps the real world, it will not only be able to make search more personalized to your taste, but it will be an alternative to Google’s PageRank Algorithm. 

 Still Early

Facebook is still a young company, and there will be many unthought of avenues for revenue growth. Although revenue from Facebook credit revenue has gone down due to Zynga’s demise, the company has recently come out with Facebook Gifts that allows users to send gifts to their friends with just a few clicks by partnering with companies such as Fab.com. Although, this may not prove successful, there will be plenty opportunities like this and if any of them succeed, you are talking about millions of dollars in additional revenue due to the large number of users.

For example, it is possible that Facebook could have a premium service for users or businesses. If say 10% pay $1/month for such a service, it amounts to a billion dollars in additional revenue. The point being that it is not unimaginable for Facebook to generate billions in revenue from other sources than just advertising.

Conclusion

As Warren Buffett once stated, “it is better to pay for a great company at a fair price, than a fair company at a great price.” I think Facebook is a great company that has numerous opportunities for revenue growth. And at the right price, it is a great investment.

Disclosure: I do not own Facebook.

Genie Energy Files Renewal of Exchange Offer

As I mentioned last week, Genie Energy (GNE) is renewing its offer to exchange common shares for preferred shares (GNE-PA). Today, they filed papers with the SEC to begin the exchange offer. 

Here is the are the details.

Investors have until January 15th 2013 to exchange shares one for one. You will have to contact your broker to do the exchange.

It should be interesting to see what happens. The common shares did go up as I expected. However, they still currently trade at a discount ($6.48) to the preferred shares ($6.98). 

I still expect the common shares to move up from here. However, there are some risks so I took some profit over the last couple of days. 

  • All 7+ million of common shares get converted. Once they get converted, there could be huge selling pressure on the preferred as most investors really don’t want the preferreds. So, the price of the preferred could go down after the conversion. 
  • It is possible that if everybody tries to convert, the exchange offer could be oversubscribed. If this is the case, the conversion happens on a pro rata basis. So, you might not be able to convert all your shares. 
  • I am interested to see what happens to the common after the conversion. It is possible that everybody that converted might want to get back into the common after the conversion causing the price to at least stay above $6. 
  • The common shares might be worth more to the die hard Genie Energy fans because they have more of a stake on the upside of the Shale operations after the conversion. 
Like I said, I did take about a $.50 profit on some of my position. I will sell everything if the common shares go above $6.70. I will buy more if the shares go down to the $6.30+ range.
 
I really do not want to hold the preferreds.
  • Management is intent on doing the conversion. This makes me a little uncomfortable.
  • In the SEC document, it clearly states that Genie might use the preferreds to raise capital in the future. If they do that, it could put pressure on the price.
  • I do not feel comfortable with IDT Energy to generate enough cash flow to support both the dividend and capital expenditure. 
 
Disclosure: I am long GNE 

McGraw-Hill sells Education Unit for $2.5 Billion

McGraw-Hill (MHP) will not be spinning-off its educational unit, but instead it will sell it to Apollo for $2.5 billion.

“The Company will use the estimated proceeds of approximately $1.9 billion, net of tax and certain closing adjustments, from this sale to sustain its share repurchase program, to make selective tuck-in acquisitions that enhance McGraw Hill Financial’s portfolio of powerful brands, and to pay off any short-term borrowing obligations.”

“McGraw Hill Financial expects 2012 revenue of approximately $4.4 billion with nearly 40% from international markets.  The Company will provide 2013 financial guidance for McGraw Hill Financial when it announces its 2012 fourth quarter and year-end financial results.”

Here is the press release.

Disclosure: I do now own MHP.

Yahoo! rounds out HypeZero10

Last week I wrote about five top picks from some of the best value based hedge fund managers (HypeZero10). Today, let’s look at the rest of the picks that make up HypeZero10.

BankUnited, Inc. (BKU)

BankUnited is Wilber Ross’s top holding. The bank failed during the financial crisis in 2009 and was taken private by a group that included Ross. It was taken public in 2011 and Ross has owned 13,721,131 shares since then.

Earlier this year, the bank put itself up for sale, but nothing materialized. 

News Corp. (NWSA)

Manager Shares (July 30) Shares (September 30) Change
Dan Loeb 4,000,000 0 -4,000,000
Donald Yacktman 80,823,447 80,556,339 -267,108
Lee Ainslie 1,924,080 4,183,890  +2,259,810
Seth Klarman 15,041,665 13,041,665 -2,000,000
Steve Mandel 13,675,800 14,042,265 +366,465
Andreas Halvorsen 22,846,690 30,757,252 +7,910,562

Even though, Yacktman reduced his holdings by 267,108 shares, it is still his top holding. It is also Halvorsen’s top holding. 

Here is an interview with Yacktman about News Corporation.

Yahoo! Inc. (YHOO)

Yahoo made it on HypeZero10 predominantly due to Dan Loeb. He owns 73,000,400 shares and it is his largest position. Lee Ainslie and David Einhorn also have small positions in the company.

Assured Guaranty Ltd. (AGO)

Assured Guaranty made it on HypeZero10 due to Wilbur Ross. He owns 19,835,370 shares and it is his second largest position. Bruce Berkowitz also owns a very small position, 51,700 shares.

Here is a piece on why he Ross is so bullish on Assured Guaranty saying it is “probably the best risk/reward position in my entire portfolio.”

Canadian Pacific Railway Limited (CP)

Bill Ackman owns 24,159,888 shares of Canadian Pacific and it is his largest holding.

Disclosure: I do not own any stocks mentioned above.

WhiteWave Earnings Conference Call

WhiteWave (WWAV) is having a separate earnings conference call on November 30th. Dean has already reported WhiteWave’s earnings as part of its earnings report. It is interesting because they clearly state they will “comment on forward outlook.” I am guessing the outlook is good as there is no reason for them to comment on it if it was not. 

I am disappointed in the Dean Foods investment. The thesis of it being undervalued has been correct. However, the wildcard, the value of WhiteWave has gone down considerably ($2+) since my valuation. As a result, my value of Dean has gone down in relation. I see it now valued between $18-$21. Obviously, the strategy of shorting out WhiteWave would have worked out nicely. Since, Dean has been essentially flat for quite a while.

Also, there has been no information about the sale of Morningstar since the WhiteWave IPO. Hopefully, it was not a marketing ploy to hype up the IPO. The more time that goes by, the more unlikely Morningstar is going to get sold.

I am contemplating of selling a full or partial stake in Dean at a loss at around $17. 

Disclosure: I am long Dean.

Arbitrage Opportunity on Genie Energy

Genie Energy (GNE) reported yesterday that will renew its offer to exchange common shares for preferred shares (GNE-PA). I reported about the interesting exchange offer last month.

To recap the offer, investors have the right to exchange their common shares on a one to one basis for the preferred shares. The preferred has the following features:

  • Has a liquidation preference of $8.50 per share.
  • Annual dividend of $0.6375 per share.
  • Redeemable following October 11, 2016 at 101% of the Liquidation Preference plus accrued and unpaid dividends.
  • Redeemable following October 11, 2017 at Liquidation Preference plus accrued and unpaid dividends,
  • Genie does not have to redeem the issue at all.
  • It is senior to the common shares.

This presents an interesting option because the common stock is trading around $6 and the preferred is trading around $7.  You could potentially buy the shares of the common stock at $6 and exchange it for 7 after conversion.

Obviously, you could short out the preferred. However, there is not much liquidity on the preferred.

I was able to buy shares at $6.01-$6.15 this morning. I expect the common and preferred to converge.

At current common stock price ($6 and change), you are getting a yield of over 10% (.6375/6). Like I said, they should have no problem paying interest on the preferred for a while, since they have a strong balance sheet. 

Disclosure: I am  long GNE

Dean Foods Upgraded at Goldman

Dean Foods (DF) got upgraded at Goldman Sachs today and increased the price target from $20 to $22. 

“We view DF as a compelling sum-of-the-parts story as: (1) we expect a full spin-off of WhiteWave around mid-year 2013 and DF currently owns 87% of WWAV; (2) we see potential for further upside to value if management is able to consummate its intended sale of Morningstar; and (3) we expect DF’s remaining Fresh Dairy Direct (FDD) business to re-rate higher on stabilization of raw milk prices, improved balance sheet and healthy cash generation profile.”

The stock is up about $.60 to $17.20 on the news.

I continue to hold Dean Foods and agree with Goldman on valuation. Read my full analysis on Dean Foods here.

Disclosure: I am long Dean.

AIG Top Pick Among Hedge Funds

On November 15, all hedge funds reported their quarterly holdings (13F) ending September 30. I updated the new HypeZero10 portfolio for this quarter. Their has not been any changes to the portfolio from the previous quarter. However, their were some interesting trades.

AIG

AIG (AIG) became the top pick for HypeZero10 as a lot of hedge fund managers bought shares of the company. Read my article here on AIG here.

Manager Shares (July 30) Shares (September 30) Change
Dan Loeb 2,250,000  23,500,000  +21,250,000
Julian Robertson 523,000  523,000  0
Bruce Berkowitz  87,987,894  86,545,718  -1,442,176
John Griffin  10,440,000  10,440,000  0
Leon Cooperman 4,586,900  8,054,600  +3,467,700
Andreas Halvorsen 2,090,000 7,505,362  +5,415,362
David Tepper 0 8,250,000 +8,250,000

Although Bruce Berkowitz sold over 1 million shares of AIG, he still holds 40% of his portfolio in AIG and is his top pick.

It is also a top 5 holding of Dan Loeb, John Griffin, Leon Cooperman, and David Tepper.

Sears

Bruce Berkowitz and Eddie Lampert still hold a huge stake in Sears (SHLD). It is Lampert’s top position and it is Berkowitz’s second largest position.

Read my article on Sears here

Apple

Manager Shares (July 30) Shares (September 30) Change
David Einhorn 1,454,520 1,090,890 -363,630
Dan Loeb  425,000 710,000 +285,000
Julian Robertson 100,930  100,930 0
Chuck Akre 35,106 35,106 0
John Griffin 751,500  662,000  -89,500
Lee Ainslie 540,211 536,441  -3,770 
Leon Cooperman 266,104 266,404  +300
Steve Mandel 1,423,209 805,269 -617,940
Andreas Halvorsen 980,600 1,094,000 +113,400
David Tepper 516,338 521,188 +4,850

Most notable here is that David Einhorn reduced his position in Apple (AAPL), but it is still his top holding. Steve Mandel almost halved his stake. 

Dan Loeb increased his stake and now it is one of his top 5 holdings.

AutoNation

Eddie Lampert still holds 48,063,910 shares of AutoNation (AN). It is his second largest holding behind Sears.

Procter & Gamble Co. (PG)

Manager Shares (July 30) Shares (September 30) Change
Bill Ackman 8,387,700 (Calls) 6,452,700 (Calls) -1,935,000
Bill Ackman 21,916,208  27,946,892 +6,030,684
Warren Buffett 59,602,203 52,793,078 -6,809,125
Donald Yacktman 27,464,378 27,781,353 +316,975

It is interesting that Warren Buffett reduced his stake by more than 10% stake in Procter & Gamble (PG). It is still a top 5 holding for Buffett.

Ackman added to his shares while reducing the number of call options. It is also a top 5 holding for Ackman.

Yacktman added to his stake, and it is also a top 5 holding for him.  

I will have more information about the remaining HypeZero10 picks in the follow-up article.

Disclosure: I am long AIG.